Regardless Of Your View On Portola Pharmaceuticals, There Is Money In Their Options

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About: Portola Pharmaceuticals, Inc. (PTLA)
by: Fred Campbell
Summary

There is a case to be made that Portola Pharmaceuticals' Andexxa will be a breakout drug with almost unlimited potential.

And there is a case that it's too expensive and may not provide the value added to justify the cost.

I provide both bullish and bearish strategies that provide the investor the means to use options for a nice gain if they make the right call.

Options can be used to play with a volatile stock in a variety of situations. There are ways to make money if you think the stock will be range bound, increase in value, or decrease in value. I think Portola Pharmaceuticals (NASDAQ:PTLA) is a company that offers a lot of potential in this regard.

First, a little bit about the company. Although there are other drugs in the pipeline, the drug that will move the stock for the next few months is Andexxa, the only specific reversal agent for apixaban- or rivaroxaban-treated patients with life-threatening or uncontrolled bleeding.

The bullish argument is this drug should be a godsend to afib patients and others who are on the new generation of blood thinners. Andexxa has been approved by both the FDA and European Union within the last year and has seen sales increase substantially as their manufacturing and sales force has ramped up. Hospital admissions attributable to Factor Xa inhibitor-related bleeding reached 140,000 in 2017 in the United States alone. At an average cost of $27,500 per dose, this is a $3.8 billion market, with possibly a similar need in Europe.

The bearish case is fairly simple as well. The cost is high and the study that led to the approval of Andexxa did not compare performance to existing standard of care such as Kcentra. A nice summary of the issues is available here. Georgetown University also did a study of cost benefits of Andexxa use that may lead to some ethical dilemmas, i.e., is it worth spending $211,056 to try to resolve an intracranial hemorrhage that often results in severe quality of life decline or death anyway?

I am not here to tell you how the company will do, I've no idea. But if you have an opinion, the following will describe how to make money while limiting your risk (if you are right about the direction, of course).

About two months ago I wrote of an option strategy to make money with PTLA if it remained in its historical range. This paper will look at strategies where the investor is either bullish or bearish on PTLA.

The first option strategy is a bullish play with long term put options using prices from July 5. The example shown in Table 1 sells ten contracts of the Jan 2020 $30 put while simultaneously buying ten contracts of the Jan 2020 $20 put. The table shows gains and losses for each potential stock price (rounded to the nearest dollar) at expiration. As you can see, the breakeven is a little less than $26 per share and a maximum profit of $4,780 is attained if the price is at $30 or above. By holding the $20 put, I am minimizing my loss to $5,220 which kicks in at a $20 stock price. Also, in this example, as in all of the others as well, I am estimating the spreads using Bid/Ask prices for the contracts. So the spreads may end up a little better or worse; please use limit orders to get the values you want.

Table 1: Bullish PTLA Option Play Using Puts

Put Contracts

Put Strike

Put Price

Put Strike

Put Price

Stock Price

Total G/L

10

$30.00

$6.05

$20.00

$1.27

$19.00

-$5,220.00

10

$30.00

$6.05

$20.00

$1.27

$20.00

-$5,220.00

10

$30.00

$6.05

$20.00

$1.27

$21.00

-$4,220.00

10

$30.00

$6.05

$20.00

$1.27

$22.00

-$3,220.00

10

$30.00

$6.05

$20.00

$1.27

$23.00

-$2,220.00

10

$30.00

$6.05

$20.00

$1.27

$24.00

-$1,220.00

10

$30.00

$6.05

$20.00

$1.27

$25.00

-$220.00

10

$30.00

$6.05

$20.00

$1.27

$26.00

$780.00

10

$30.00

$6.05

$20.00

$1.27

$27.00

$1,780.00

10

$30.00

$6.05

$20.00

$1.27

$28.00

$2,780.00

10

$30.00

$6.05

$20.00

$1.27

$29.00

$3,780.00

10

$30.00

$6.05

$20.00

$1.27

$30.00

$4,780.00

10

$30.00

$6.05

$20.00

$1.27

$31.00

$4,780.00

Or, to put it graphically:

Figure 1: Graphical Representation of Option Play

If you are really optimistic, you could make the play with the $35 and $25 puts and come up with a potential gain of $6,110 and maximum loss of $3,900 with a $29 BEP. See Table 2 and Figure 2.

Table 2: Bullish Play With Higher Strike Prices

Put Contracts

Put Strike

Put Price

Put Strike

Put Price

Stock Price

Total G/L

10

$35.00

$9.50

$25.00

$3.40

$24.00

-$3,900.00

10

$35.00

$9.50

$25.00

$3.40

$25.00

-$3,900.00

10

$35.00

$9.50

$25.00

$3.40

$26.00

-$2,900.00

10

$35.00

$9.50

$25.00

$3.40

$27.00

-$1,900.00

10

$35.00

$9.50

$25.00

$3.40

$28.00

-$900.00

10

$35.00

$9.50

$25.00

$3.40

$29.00

$100.00

10

$35.00

$9.50

$25.00

$3.40

$30.00

$1,100.00

10

$35.00

$9.50

$25.00

$3.40

$31.00

$2,100.00

10

$35.00

$9.50

$25.00

$3.40

$32.00

$3,100.00

10

$35.00

$9.50

$25.00

$3.40

$33.00

$4,100.00

10

$35.00

$9.50

$25.00

$3.40

$34.00

$5,100.00

10

$35.00

$9.50

$25.00

$3.40

$35.00

$6,100.00

10

$35.00

$9.50

$25.00

$3.40

$36.00

$6,100.00

Figure 2: Graphical Representation of Table 2

Conversely, if you think this will be a $17 stock again come January, then you can make a bearish play with calls. The example in Table 3 sells ten contracts of the Jan 2020 $20 call while simultaneously buying the Jan 2020 $30 call. Breakeven is a little over $25 per share with maximum profit kicking in at $20 and maximum loss at $30 and above.

Table 3: Bearish PTLA Option Play Using Calls

Bearish

Call Contracts

Strike Price

Call Price

Strike Price

Call Price

Stock Price

Total G/L

10

$30.00

$3.00

$20.00

$8.00

$19.00

$5,000.00

10

$30.00

$3.00

$20.00

$8.00

$20.00

$5,000.00

10

$30.00

$3.00

$20.00

$8.00

$21.00

$4,000.00

10

$30.00

$3.00

$20.00

$8.00

$22.00

$3,000.00

10

$30.00

$3.00

$20.00

$8.00

$23.00

$2,000.00

10

$30.00

$3.00

$20.00

$8.00

$24.00

$1,000.00

10

$30.00

$3.00

$20.00

$8.00

$25.00

$0.00

10

$30.00

$3.00

$20.00

$8.00

$26.00

-$1,000.00

10

$30.00

$3.00

$20.00

$8.00

$27.00

-$2,000.00

10

$30.00

$3.00

$20.00

$8.00

$28.00

-$3,000.00

10

$30.00

$3.00

$20.00

$8.00

$29.00

-$4,000.00

10

$30.00

$3.00

$20.00

$8.00

$30.00

-$5,000.00

10

$30.00

$3.00

$20.00

$8.00

$31.00

-$5,000.00

10

$30.00

$3.00

$20.00

$8.00

$32.00

-$5,000.00

Figure 3: Graphical Representation of Table 3

As I stated before, I've no idea which way PTLA will go. And remember, options are great for leverage but can be very risky, especially if you are going to use naked options. In all the examples above, I bought a corresponding option to offset some of the losses. But for those of you that have strong opinions on any stock, one way or the other, these are good ways to play your hunch and limit your losses. I do realize this is a simple primer that most of you know already, but I'm hoping this will make at least one of you aware of the potential gains and losses with options.

Disclosure: I am/we are long PTLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long 600 shares with a covered call and have written 10 option contracts in a bullish trade as described in the first example.